The Rise of the Apple TV: What should be Apple's next step?

Frost & Sullivan recently reported that Apple TV made up more than half of the streaming device market for 2012, beating competitors like Roku and TiVo. Not bad for something that Steve Jobs once referred to as "a hobby" for the company. What should be Apple's next step for the little black box?

First, let's put that news into some context. The Apple TV is the most popular streaming box out there, according to this report - and that's a device that Apple doesn't separately report in its quarterly revenue figures. In fact, the Apple TV's contribution to Apple's balance sheet this past quarter is buried in the "Accessories" portion of its quarterly statement, which for the most recently reported quarter was $1.18 billion (out of $35.23 billion in total revenue).

Compared to the gargantuan revenues of the iPhone ($18.15 billion), the sizable revenues of the iPad ($6.37 billion), or even the Mac ($4.89 billion), that Accessories number is pretty small - especially when you consider that it includes all other Apple-branded hardware peripherals, and accessories made for iPhone, iPad and iPod touch.

But Tim Cook did offer details earlier this year that may give some insight about the success of the Apple TV. In May, Cook said that Apple has sold 13 million Apple TVs to date. About half of those were sold within the previous year, Cook revealed.

That's an average of almost 1.63 million Apple TVs sold each quarter. At $100 a piece, that's $163 million in Apple's coffers from Apple TV each quarter. Some quick back of the envelope math suggests that Apple TV is contributing a little less than 14 percent to Apple's overall "Accessories" revenue numbers. Small potatoes for Apple's balance sheets, perhaps, but if Frost & Sullivan's analysis is correct, a huge chunk of the streaming box market. Apple's biggest competitor, Roku, grabs less than half the remaining pie, according to the report. Other competitors divide what remains into even smaller slivers.

The Apple TV has been around for six years and is already in its third hardware generation. Apple doubling its installed base of Apple TVs in the last twelve months certainly indicates that public momentum for the device is picking up.

But the overall small numbers demonstrate just how nascent the streaming box market really is. While many of us Apple enthusiasts have bought Apple TV, there are still a huge number of consumers who don't find the device particularly useful or interesting, or feel that their TV viewing needs are serviced well enough by cable TV, DVRs and other set-top devices.

Apple's gobbled up a huge piece of a very small pie. But that small market is growing.

Where does Apple go from here?

The second and third generation Apple TV - the small black box - lacks any sort of local storage capability, but makes up for it by being more programmable than its predecessor. Not only is it easily updatable with firmware improvements and other enhancements, but it can be programmed with entirely new apps.

In mid June, Apple rolled out an update for the Apple TV that added support for several new content services including ESPN, HBO, subscription-based anime service Crunchyroll and more.

Some analysts and pundits hope to see the Apple TV become a disruptive technology for television watching - something that people could use in place of cable television altogether. And indeed, some Apple TV users find the content from iTunes, Netflix, Hulu and the other services the Apple TV supports to be sufficient for their viewing habits.

But it's clear that Apple is taking a more iterative approach with the device - an approach that requires customers to have other media at their disposal. Take HBO Go, for example. The app works the same way on the Apple TV that it does on the iPhone and iPad - you can stream HBO content, including current and archived TV series, but it requires you to validate by entering your cable service provider account information first. You can't subscribe to the service a la carte, as it were.

Tim Cook describes a "grand vision" for the Apple TV and calls television itself an "area of intense interest" for the company, but so far he hasn't publicly articulated what that vision is.

According to Frost & Sullivan, the secret to the Apple TV's success is AirPlay, which enables iOS devices and Macs to stream audio and video content to the Apple TV. AirPlay is the killer app for the Apple TV, because it enhances the experience of users of other Apple products by making it easier for them to share content on their television.

Apple implicitly understands this - the company's executives have spoken for years about the "halo effect" of people buying one Apple product and having a great experience with it, then that driving their purchase of more Apple hardware. To that end, AirPlay is getting a big boost in OS X Mavericks, due out later this year. Apple TV owners can already mirror the Mac's display to their television. But with Mavericks' improved Multiple Display support, Mac users will be able to use an Apple TV-connected television as a completely independent display.

The television question

Analysts like Gene Munster have long prognosticated that Apple will build an actual television, but the economics of doing so don't make a lot of sense, at least not right now. Flat panel TVs are an increasingly commodity-drive market, with inexpensive Chinese manufacturers flooding the market with cheap sets you can buy at Walmart and Target.

There may be a window for some new brands to be established in the Ultra HDTV market - the new 4K sets that are coming out. Apple could leverage its legendary supply line muscle with Chinese manufacturers to produce 4K televisions.

And Apple does appear to be making a play for 4K on some of its hardware, like the new Mac Pro, which will feature Thunderbolt 2 interfaces capable of driving 4K resolution displays. But that's a technology that is squarely focused on the high end of Apple's Mac line at the moment, and for the Mac Pro that makes a lot of sense: it's a machine that's historically had a high penetration in the professional digital video and film editing market.

But what, ultimately, would an actual Apple television - 4K or otherwise - gain Apple in the long run? It could establish itself as a niche player - a high end boutique brand, perhaps, but could it muscle itself onto store shelves the same way that competitors like Samsung, LG and Vizio, or long-time players in the field like Sony and Panasonic, have?

Stay the course

It's a smarter play for Apple to continue to to refine the black box with software updates, then roll out a new generation as it makes sense with new features like UHDTV support as it becomes something more consumers are looking for.

While more and more televisions are coming from the factory with "smart" capabilities like connecting to the Internet and to services like Netflix, many consumers continue to use them as simple dumb terminals for their set top boxes and their streaming devices.

For as long as that's the case, Apple's best strategy for the Apple TV remains building a black box that can connect to any of them, instead of building its own branded television. Compared to a television, the Apple TV is almost an impulse buy, and it capitalizes on the halo effect that continues to drive consumers to new Apple products.

Would you buy an Apple-branded television if they make one? Is the Apple TV a better solution? Or is the whole thing stupid? Tell me what you think in the comments.

I wish they would update it to make using it with an iPad more direct... by that, I mean a direct WiFi connect from iPad/iPhone to the ATV. That way, if you're using it to give a presentation, you don't need to connect both devices to the wifi network where you are. It seems Apple is somewhat overlooking one of the best uses of Airplay... presentations and education.

Also, I'd love to start seeing App Store apps being available on it. Other than that, it's nearly a perfect little device. It's amazing it does so much on 1 watt! And, with Beamer, I can play pretty much any video on it, pushed from my desktop (and the remote works!). I would like some better solutions, though, to go the other way and access my media library through some interface on the ATV (haven't tried Plex yet, but maybe something is coming there).

What should the next step be? Simple. Blow people away with a version of ATV that reinvents how we interact with our video.

Right now, it's a grid of sources. I understand that this works on iOS but the TV isn't a phone. Blow up the grid of sources and really think about what would delight people who use ATV. Here are two specific suggestions:

1) Make adding things dead simple. Right now, adding new sources is a pain. Look to what Roku does - when you add Netflix for example, it prompts you to go to a special URL in your browser. That generates a several digit code which you input into the Roku box. Much easier and more streamlined and friendly than entering my login information on an onscreen 'keyboard.'

2) Way back when, Boxee shipped a UI revision that let you choose movies or TV SHows. At that point you didn't see networks or sources like Hulu, you saw a list of shows or movies. You could search and when you found one you could bookmark the series. That's how people think of video - "I want to watch Burn Notice" not "Let me find the USA Networks App... ". Yes, this devalues network branding, but work with them to overcome that ("If you like Burn Notice on USA, check out Covert Affairs...")

Whatever they do, I wish they'd hurry up! I can see some convergence with iTunes delivering UHDTV and 4K displays - a chance to reinvent a real smart TV. To ship more STB units they need to add value, like merge ATV & Airport Express.

ok, so we got our purchased itunes music and movies streaming on apple tv, why not go the whole slog and make our purchased games stream through the apple tv too, eg call of duty et al. Also pick and choose which apps we want to install on the apple tv too, can the app store get any bigger than exposure on our tv screens. i am not sure apple would want to go the set top box route either, sure the tv has become and should be just a display device to display our content onto but who's logo would you want to see first; the apple or the golf ball target.

More content and maybe apps. I would love to have apps like BBC iPlayer on the box rather than being restricted to who Apple does deals with.

They could even potentially take on the XBox and PlayStation. They have the App Store, all it requires is a few high end games. Plus with universal games this could potentially move more games to the Mac.

4K? How about giving higher bit rates at the current 1080p, and frame rates over 30fps. Right now sports and news cannot achieve the "live" look while the frame rate is capped at 30.
I love the AppleTV, but 1080p is incredibly good when you give it the bits it needs. Seen a blu-ray projected on a 30 ft screen? Looks fantastic.

Apple needs to balance quality against bandwidth. While I'm constantly surprised at how good HD stuff looks for the fact it only takes about 10 seconds to start buffering to me. I can absolutely see the deficiencies in low contrast gradients or fast action.

Thankfully, the release of h.265 later this year or next should go a long way towards making the difference between iTunes downloads and BluRay pretty much indistinguishable. At NAB, I saw tests of 4K material on a 72" screen, and there was no discernible banding or breakup anywhere. And this was at between 4 and 7Mbps. If Apple can put h.265 decoders into a next-gen AppleTV, then they could deliver superior 1080 image quality at probably 2/3rds the file size. Or truly amazing 1080 at current file sizes. 4K material would bump that up, but with so few screens in consumers hands- it may be another year before Apple decides it's worthwhile to begin offering 4K content.

It uses the ARM NEON SIMD for video playback. In truth the playback shouldn't be the issue as HEVC is scalable - the same video stream drives a UHDTV as drives an iPad as drives an iWatch (?). It's the encoding that's tough but apparently lends itself to parallel processing unlike AVC. Should be a good candidate for OpenCL.

Is it serious difficult or maybe a licensing thing for apple not to have a universal search function within Apple TV?
Like one search to penetrate all the apps and content you have at your disposal? Like show me that "Pulp Fiction can be purchased via iTunes or played on Netflix or watch clips on YouTube?
They need to fix that, because its honestly annoying having to search all the apps individually within Apple TV.

I can't believe there are no comments on here about the lack of third-party apps on the Apple TV. That's the one killer feature that would get me to buy one. Where's the app store?

I can already play Netflix, Hulu, and a bunch of other things that the Apple TV doesn't support from my Blu-ray player. I can already play iTunes music off my iDevice on my home stereo system with another mechanism. I don't buy movies from iTunes. Aside from AirPlay, which I haven't really had a need for, why would I buy this thing, even at a nice low price?

Now, make it wildly customizable via 3rd party apps, and I'll be all over it.

3rd party apps are going to be drastically restricted by the internal storage in the current AppleTV. The majority of the 8GB of flash space is needed for buffering HD file downloads. With a movie taking up as much as 5GB, that leaves very little space for anything beyond web-connected apps. Plenty of space for additional "channel" apps, which are hilariously small, but games will eat up space quickly.

Why does the AppleTV need anything beyond content apps if you can push everything else from your iPad/iPhone/iPodTouch/Mac via AirPlay?

I would really like to see Apple stay with the small box, but give it more power and flexibility than it currently has. Ideally, I would like to see iOS fully rolled out on it and apps available to us right out of the App Store. I love AirPlay, but I would rather launch a native app and use my TV like a giant monitor and maybe control it with my iPhone or iPad.

The killer feature that might help sell the 4K TV set is the iSight camera. It could detect people's gestures for controlling games and some TV features, and might even be able to detect individual users for customized TV channel lineups, etc. In this scenario, the 4K set would of course have a Siri microphone, and the basic Apple TV set-top "puck" would only have the Siri mic and not the iSight camera. Still, I'm not convinced Apple ever needs to ship their own TV set of any kind.

I say 10 years because it may take a long time to finalize all the deals needed to get TV, movie, and live event (especially sports) content into iTunes. And Apple might need to build out their iCloud server infrastructure to handle the load. This negotiation and server build-out needs to be done whether or not Apple has their own TV set.

Another reason why Apple's "real" TV strategy might be years away is that some of the existing television industry players may not be willing to cut deals with Apple until they're forced to. Record labels and artists had to go with iTunes when MP3 ripping was destroying their profits. Not sure that will ever happen in the TV / movie industry to the same extent that it happened to the music industry, because of the HDCP copy protection built into HDMI devices, etc. It might take some sort of consumer backlash against astronomical cable / satellite TV fees, or pressure by internet-based players (such as Apple.)

All i want the next Apple TV to improve on is a more universal remote that can adjust power, volume and input on my TV/Reciever. Plus a better way to type without using the mostly pointless Apple Remote App. Apps would be nice but for now, with over-air, Netflix, Hulu and iTunes, our household is set for a while. I would like to have some kind of DVR functionality to Live Over-Air TV, but I know that would be a bit of a stretch right now.

Once the MFI game controllers are out, put the App Store on it and let us write games for the Apple TV :)

Actually, even without it supporting 3rd party apps, the App Store on the Apple TV would potentially be a good way to discover new apps for your linked iOS and OSX devices as you've got more screen real estate to work with.

People don't buy televisions like they buy computers. I buy a new TV every 6-10 years, on average. It's just a big display, really. I'd rather the TV stay relatively "dumb" and let me purchase relatively inexpensive gadgets to hook into it, to deliver content. Firmware updates for the hook-in gadgets. Given Apple's DNA, a television doesn't make sense to me - unless they wish to incorporate the SOC for Apple TV and interface into the set itself. They do like to control the entire experience.

Right now, my Blu-Ray player, Apple TV, television, all have Netflix on them. Ridiculous. I just use the Apple TV version.

The AppleTV will take over the house with Siri, it will move from a home video solution to a voice enable Siri home automation solution. Hue lights, Nest thermostat, ect... Ever wonder why Hue is only sold in Apple stores, they are getting primed for a keynote...

Very true, although thinking more long-term, I don't necessarily think that continuing with the STB stops Apple from releasing a 4K panel to compliment it. It could well be that a proverbial 4K display for the Mac Pro might do double duty as an Apple TV display, with a few extra HDMI ports. After all, a full-blown Apple TV would never include "legacy" ports such as one could find on even the most modern TV's shipping today. Only Apple has the balls to end-of-life technologies that other manufacturers would include (usually they have the audacity to call them features).

I would also like to see Apple develop their STB Into a console and open up the platform for games too.

I agree. As a developer and consumer of Apple products, I find it more important in creating an add-on that Apple had full control of. Then one only has to change the input of whatever TV they have chosen to get to the Apple add-on. Apple is not in the business of making "everyone" happy. Their focus is on "complete", "solid" products. A single sized TV will not succeed and supporting 4-10 models is not a good place to be. My guess is Apple is shooting for the DVR.

And if the TV manufacturers are smart they'll eliminate all the "smart" crap from their units and concentrate on producing high quality displays. Make the standard HDTV a monitor without a tuner. And you don't need multiple HDMI inputs either. Most AVRs are HDMI switches anyway. Plow all the R&D into making the display and resolution the very best possible. Let Apple and others make the smart-boxes that drive the display.

Agree. Apple won't even feel the need to ship a consumer TV set until 4K sets are mainstream, and there is plenty of 4K content, and the economy gets better worldwide, and broadband to the home becomes faster + more widespread + cheaper. Not necessarily in that order.

And even after all that, when the 4K TV market is booming, Apple wouldn't ship a TV set unless they feel that they can disrupt the TV hardware industry and make lots of money doing it. There are plenty of entrenched TV hardware manufacturers out there, known brands and no-namers, who can and will undercut Apple on price. The "race to the bottom" is going full speed ahead (down) in the consumer electronics space.